Credit spread
Also called Vertical credit spread, short vertical
Selling an option and buying a further out-of-the-money one on the same expiration for a net credit, with the loss capped at the width less the credit.
A credit spread sells one option and buys another of the same type and expiration further from the money. The one you sell is worth more, so you take in a net credit. The one you buy caps the loss.
- A bull put spread sells a put and buys a lower one.
- A bear call spread sells a call and buys a higher one.
The numbers
| Figure | Formula |
|---|---|
| Credit | Short leg's price − long leg's price |
| Width | Distance between the strikes |
| Max loss | Width − credit |
| Breakeven | Short strike − credit (put), short strike + credit (call) |
| Return on risk | Credit ÷ max loss |
A $5-wide SPY put spread for $1.20 risks $3.80 to make $1.20, per share, about 32% on risk. Times 100 per contract.
Picking one
The trade-off is between credit and distance: closer to the money pays more and is reached more often. Look at where the short strike sits against the expected move, the walls, and its breach rate.
In Theta Vantage
The strategy calculator builds a bull put or bear call spread from its library on the expiration you pick, and prices it at the current quotes.